Automortal Sins will be an infrequent series about the true sins in the auto business. It won’t be the sins which some bloggers regard huge. We won’t blame lapses in styling, branding, we won’t lambast OEMs for abandoning sports cars in favor of appliances. Building the wrong car once in a while is a minor iniquity compared to the huge, most egregious, and definitely mortal sins committed by automakers every day, without the smallest amount of remorse. Here is the first one:

Automortal Sin #1:Forget Service, and to keep it holy

Flouting the importance of customer service is the auto business equivalent of adultery and the coveting of thy neighbor’s wife: It’s bad, it’s potentially deadly, and everybody is doing it. It is not the touchy-feely reasons of good customer relations that make great service all-important for an automaker, it’s hard cash. Service, not cars, is the prime moneymaker in the auto business. Don’t pay attention to service, and you will develop huge pains in your bottom line.

At a big European OEM I had been intimately familiar with, in a good year, the profit contribution of new cars was 33 percent.. Another 33 percent came from parts sales. And yet another 33 percent came from financial services. Customer service in a wider sense brought most of the company’s profit – in a good year. In a bad year, the non-new car profits kept the company alive and paid for the loss in the new car business.

At the dealer level, matters are even more extreme. New cars often are a loss leader for a dealer. How do you think a dealer can offer you a car below his cost and survive? Sure, his true cost may be a little lower than he lets on, but the real reason is in the back: Servicing cars is a goldmine. Dealers earn double on each service job: They can charge $100 or more for an hour. They pay maybe $20 an hour to the mechanic when there is business, and nothing when there is none. They sell you parts with obscene mark-ups. A set of brake pads, or a rotor, for which you pay from $50 on upwards, costs $5 at the factory in China. Little plastic parts that are unique to your car are better than selling drugs or pornography. Nobody else makes them, so your friendly carmaker lists them at sometimes hundreds of dollars, and often they cost pennies to make. If I would be President, and if I would need a new area of responsibility for an unemployed DEA after a lost war on drugs, this would be it.

You probably are thinking now: This may be true where this Kraut is from, but this is America. Nobody is left starving here, even car dealers. According to NADA, that is America’s National Automobile Dealers Association, new car dealers lost money on every new car sale between the year 2006 and 2010. In 2011, the average dealer finally managed to eke out a tiny profit on his new car sales, but only when counting profits from F&I, which finally start flowing. Pure new car sales remain a loss leader.

Ironically enough, a new car dealer makes much more money selling used cars, and he did so in all years except in 2008.

Where the true money is made on a consistent basis is in the service department. NADA says that in 2011, a dealer’s average profit margin on service and parts sales was 46 percent. 46 percent!!! Both to dealer and OEM, service is a lifeline during good and bad times. We know how car sales fluctuated since in the past 20 years. Service and parts sales are relatively steady and hovered at around $80 billion for all NADA dealers since the year 2000.

Of course, once the warranty is over, the fleeced customers tend to flee their dealer as if he has the plague. They end up at Meineke or Pep Boys who look cheap compared to the franchised dealers. Trust me, they still make a lot of money, even if they sell you the $5 brake pad at the cut-rate price of $49.50 instead of $55.

If the franchised dealer could hold the customer a little longer, dealer and OEM would make an excrementload more money. I am able to tell you how much, but I won’t. I had access to these numbers back when. They were confidential – and huge. Just consider this:

The average cost of a service job goes up with age. Keeping a customer in the shop of a franchised dealer means increased service profits, and usually it means a new car sale at the end. Customers who fled to Pep Boys can also be very reluctant to come back to buy a new car. What is done to keep them? Nada.

OEMs spend obscene amounts of money on marketing their new cars, dealers spend wicked amounts of money on advertising theirs, both throw away immense sums on incentives. All to sell a product that brings very little profit, or all too often no profit at all. There is a money printing machine called service, but this is regularly left devoid of ink and paper.

GM committed a lot of nasty sins. Here are two of the most egregious:

To lose control of GMAC. Financial Services were the last true profit center for GM, and they let slip it away .

To kill Mr. Goodwrench, and to replace the icon with meaningless Certified Chevrolet etc. Service.

GM is not alone with the stupidity. When times get tough, most OEMs happily scuttle what little market support they gave to their parts and financial service ventures and use it to prop up their doomed car sales. This can be an especially deadly sin. Especially in tough times, the service money keeps both company and dealers alive. When people stop buying new cars, they spend more for repairs. Something that is sadly all too often ignored in the industry. Look at the blue NADA chart above. Want to feel like a real car executive? Say the chart doesn’t matter. Speaking of Detroit: Ford quietly has been better and more proactive in this department. Maybe because old Henry once said that he would give the Model T away for free if he would be given an exclusive on parts sales.

Ignoring the money made from customer service is one of the most egregious automortal sins in the universe. Why is this sin committed as a matter of daily routine? Nobody knows. As one auto executive told me after a few beers: “We all have sinned and fall short of the glory of God. Barkeep! Two more.”

110 Comments on “The Mortal Sins Of The Auto Business...”

The dealer part is true (expect for the parts about “new car dealers lost money on every sale between the year 2006 and 2010″ which I assume should read as average, not every), but on the OEM side, it’s worth noting that the profits are booked as marginal profits with no allocation from the development.

Trust me, for many years I had to look at the true, unadulterated, real numbers – in a well-managed company. Of course, you need a good bank for it to make a third of your profits. Look into the annual reports of well managed companies, and they will give you hints. They don’t disclose the profit made from parts sales, that is all bunched into operative profit on “sales.” The numbers can be pornographic.

To increase parts sales, you must increase service business at your franchised dealers – they take most.

I haven’t been inside the company you refer to, but I’ve seen the inside of a few american and european OEMs, and none load the parts cost with an indirect allocation from the vehicle development teams and purchasing groups (e.g., supplier tooling) so the profit number looks bigger than it is on and ABC basis. It’s a very important part of the business, but if you were seeing executive numbers and weren’t into the accounting detail, you wouldn’t have noticed. Certainly service retention drives part sales and OEMs, and most dealers, seem to pay far less attention to service than new marketing assuming that they have a captive customer once a sale is made.

Most auto dealer frachisees pretty much only deal with the hassle & expense of new vehicle sales because it’s a gateway to the revenue & profitability that servicing, and far more importantly, used car sales & financing operations allow them.

You seem to be saying that the best way to own a car is to buy new and trade in for new before a bumper to bumper warranty expires… That way you never feed into the high profit zone of the auto repair sharks.

I can see that as a way to go based on the numbers you cite but it does go somewhat against the way I have done things over the last 45 years. My way was when I was not making a fat pay check was to find a cherry used car that had been well maintained by someone known to me like the grandparent of a close friend and keep up the oil changes etc every 3000 miles and run it till it was junkyard fodder rather than try to sell it…. This averaged out to about a car being 10 to 15 years old when i put it out to pasture.

When I could afford it I treated myself to the luxury of a new car where I could spec just the options and color I wanted and again I continue to be meticulous about maintenance and once more I drive the cars darn near forever (a 1989 I sold in 2004 and I am driving now the car I bought in that year and I expect I will still be driving it 6 years from now.

So what is the real best way to own a car? Buy new and trade in when the 4 year bumper to bumper warranty expires on some thing else with soup to nuts protection for a minimum of 4 years? Go back to buying solid used and run it into the ground I would like to know the current wisdom on this topic

Far be it for me to claim I know that what I’m about to state is factually sacred, but I’m under the impression that the best strategy for most consumers is to buy the most reliable vehicle they can find, pay cash for it if they are able to (eliminating what can be significant financing fees/charges/interest), service it diligently with high quality products and parts, and drive it for as long as it’s reasonably practicable to do so, before being lulled into purchasing another one of the “2nd largest ticket items” that most consumers ever will, that depreciates rapidly.

On that note, given today’s economic climate, and lessons of the last decade, it’s worth noting that consumer credit (i.e. debt) is now at record levels (yes, even higher than it was during the “halcyon” days of the housing bubble, circa-2006), so financing is obviously becoming more and more of THE (or close to THE) money-maker for “auto dealerships.”

Getting people into prolific and perpetual debt, financed at higher rates of interest, is the fastest growing and most lucrative business in the new world economy.

Of course the money is in used car sales and in the service department! Look how little they will offer you in trade vs. what the ask is on a shiny “CPO” car on the lot! And $150/hr for service is not at all unusual for the premium brands, plus those fat parts markups. I happen to know from a friend who worked there that our local Saab dealership took MSRP for their parts and marked it UP 15%. They then gave a 15% Saab Club discount – oh, THANKS, very generous…

Other pure profit makers – “bundled services” – same dealer got $1200 flat rate for the basic 60K service on a Saab 9-5 or 9-3. This is about $250 in OEM parts and two-three hours labor working slowly at home. Ka-Ching! $4-500 an hour!

@Herm,

Hyundai can offer a 10 year warranty because it is limited to mostly things that don’t break. It is not 10 year bumper-to-bumper covering every little squeak and rattle. And, cars are pretty darned reliable these days.

@Windy

The cheapest way to run a car is to fix and maintain it yourself. Cars are not spaceships, even new ones. If anything, my 2011 BMW is easier to work on than my ’86 or ’91 BMWs were for the simple reason that the CAR can tell me what ails it. You get the usual symptoms that there is something is wrong, plus codes telling you what the computer sees as not quite right. You need some different tools, i.e. a laptop, the right cable, and some software, but it is still just a car – nuts and bolts. Keep it long enough and it really doesn’t matter whether you bought it new or a few years old – that early depreciation amortizes down to nothing. And my 2011 will be a LOT easier to work on when it is 15 years old and has 150K on it because I will have owned it from 3/10s of a mile and it will not have all the “defered maintenance” that those other cars had when I got them.

Subcontractor makes part with materials and labor cost of $5. They charge $10 for it when they sell it to Big Automaker. Big Automaker sells it to Dealer for $25 – this amortizes design and warehousing cost. Dealer sells it to you for $50, amortizing his cost of fancy showroom, parts window, capaccino machine, etc..

This greatly oversimplifies it of course – these days the subcontractor may well have done all the design work.

Its a mortal sin to call GMAC a profit center at the end. It crashed and burned due to mortgage lending. It did prop them up longer than they should have been in the early 2000’s as they rode the mortgage wave.

What is true is that GM is handicapped in achieving the same level of profits as Ford/VW/Toyota without a true strong captive finance unit.

They are in the process of re-building that through GM Financial and acquisitions of parts of Ally’s foreign lending business which is already completed.

But, that doesn’t happen overnight.

I imagine GM Goodwrench was tossed aside in the efforts to re-build each remaining brand and get rid of the ‘GM’ image across Chevrolet/GMC/Buick/Cadillac activities.

Bertel. you’ve made some good points, but after speaking with the guy from whom I’ve bought four cars in succession, I’ve come to think that the profits are coming from elsewhere, namely from the trade-ins. The way he tells it, most people don’t want to go to the trouble of selling their old vehicle themselves nor do they want to bother shopping it around. So they generally accept whatever the new car dealer will allow toward the current purchase. It’s a can’t lose for the dealer. They can always wholesale it for a profit with no effort, or if it’s a desirable model, they can spiff it up and put it out on the lot. The profits then can be in the thousand rather than the hundreds. Does this not seem true?

Regarding the trade in, it really depends. Dealers often play a game referred to as “four square” where they will shift costs to different areas depending on what’s important to the customer.

Gotta have that low monthly payment? You need to take less on the trade.
Gotta have X $$ for that trade? The financing just got more expensive, you gotta take that extended warranty or make a bigger down payment.

I hate seeing the “four square” charts at dealerships. It lets me know they dont hire the smartest sales team. Its a crutch for sales people and sales managers to keep track of what they cant do mentally. I hate dealing with these folks. Its not a “game” to me. Smarter, easier to deal with folks are usually in the back offices, the fleet and internet sales people.

I’m interested in what the optimal point in the curve is on dealership pricing for maintenance. I always wonder if they weren’t a little more cost competitive with indy shops if they wouldn’t end up making more money.
A lot of people trust dealerships figuring they know the exact ins and outs of the car, but if it come at a huge premium they’ll take their chances.

The thing that pisses me off is when I take my new car with <10k miles on it to the dealer for a routine oil change and they try to strong arm me into some $350 package (on an 18k economy sedan to boot, not some luxury barge). That's bad business if you ask me, push it to far and I won't ever step a foot back in your service bay.

Our local Nissan dealership’s garage has a chart that lists the common service prices of local competing shops like Firestone, Pep Boys and Precision Tune Auto Care. They are almost always cited incorrectly, which really offends me. Like I don’t know how to pull out my phone and find the actual price of a fluids change from the competitor. The last time I actually went to said dealership’s garage was when I was forced to, after the car-wash destroyed one of the mirror skullcaps on our ’05 Murano SL and I had to find a new one…

I took my BMW in for its annual safety inspection to the dealer (price mandated by the state) I bought it from – they tried to talk me into getting the tires rotated and an alignment for $300+, not covered by the BMW maintenance scheme, of course. I pointed out that BMW specificaly says NOT to rotate the tires on thier cars in the Owners Manual, and the back peddling and mumbling was epic. Then they had the gaul to send me a letter saying how regretful they were that I turned down “necessary services” and here is a coupon in case I changed my mind. If BMW isn’t paying, the dealer sure isn’t doing it!

My tires are wearing perfectly evenly, and slowly. Which is unfortunate as I would LOVE for these #$@$@#$ runflats to wear out so I can put some proper tires on the thing.

Because ultimately I am too cheap to do that. :-) I actually did try to sell them when I first got the car, no takers. And really, I am somewhat exaggerating – the 3rd gen H-speed rated Continental RunFlats on my car are not that bad. The ride is fine, and the grip is as well. But to put it in perspective, my non-RFT but Z-speed rated winter tires ride better, grip just as well, and are a lot lighter for less than 1/2 the price despite being higher profile and narrower. So it won’t get replacement RFTs when the time comes.

Sell it? Those tire would be dust before I sell this car most likely. Unless BMW gets their head out of their butt on the subject of wagons and manual transmissions.

“Late model used cars aren’t even any cheaper than than their new counterparts…”

You’ve got good credit, so you’re not the intended victim here. I knew a gal that was a cashier at a GM dealer and she and other employees were issued brand new cars to drive and rack up the miles. The dealer would then sell these late models to poor credit buyers at loan shark interest rates and of course, no rebates.

Denvermike pretty much nailed the late model pre-owned game. Troubled credit buyers almost always make a deal based on a monthly payment and often settle for a really bad total deal because of their lack of capital.

Steven Lang also mentions this a lot in his articles where popular late model vehicles are often auctioned at retail prices or higher, just to be sold as “finance-fodder” where a BHPH or financing company will make their profit on the financing.

The cash customer will never make his best deal on a pre-owned lot but by getting to the distressed or trader customer before he trades it in, or getting something privately that falls outside the normal models that BHPH or pre-owned program lots tend to hoard.

Late model cars are the ones that shady dealers buy to make a killing on with bad credit buyers…

(Sebrings, PT Cruisers, Malibus & Galants) were what I saw during my lot attendant days. The funny thing is all these people (including those with good credit) probably lost more money “driving off the lot” than anyone who bought a new car because dealers could get these lease/rental returns at around $7500 below retail book which meant they were worth absolutely nothing to the dealer on trade in… and what cash/private party buyer wants to buy a late model Mitsubishi Galant or Sebring?

“Should we establish government funded and protected financing for poor/low credit customers to avoid this?”

We have previously established gov’t financing for the food, room/board, and now healthcare for such customers. If overpaying on a buy-here pay-here used car is the worst that happens to them economically, then I’ll gladly take all of their benefits and drive an overpriced bhph car I got taken on.

sunridge. The issue isn’t the rate, which their likelihood of default may drive for the most part, it’s that they aren’t as financially savvy and are “suckered” by the salesmen playing with the 3 other boxes so that the customer hits their monthly payment target. The customer doesn’t really realize how much more they are paying when the price goes up or the term gets extended because the whole pitch is geared around the monthly payment.

There’s a saying that Prime buyers by the car and Subprime buyers buy the payment.

That said, they could still be stiffed on rate if they don’t shop around outside the dealership for financing. Credit Unions are the bane of all indirect near-prime lenders’ existence.

I think we’re talking two different things. I’m talking about BHPH…people who have no other choice.

As far as I know, very few OEM branded dealerships operate BHPH. They certainly have a couple subprime lenders they use. But, as long as the finance company accepts the note, the risk is on them..not the dealership.

Anyone with mediocre to reasonable credit who is stupid enough to think that they ‘have’ to finance at a dealership and doesn’t shop around deserves what they get.

This is why I tell people that there is much more profit–and therefore much more negotiating room–in used cars, particularly late-model ones. The buyers I encounter are almost afraid to bargain on something that’s already pre-owned…

Bertel, you neglected to list GM’s third deadly sin. They made cars of such ridiculously miserable quality that owners were having to have service performed years too soon – like a hip replacement for a 25-year-old. It soured customers on ever again buying a product from the General.

Case in point was the excrable 05 Pontiac Grand Prix GTP that I was fool enough to buy in 2007. If Drew Carey gave me GM vehicle on “Let’s Make a Deal” on Monday, the damn thimg would be for sale on Tuesday.

I buy a new vehicle every two to three years and never return to the dealership where I bought it unless I need warranty work.Which btw,I haven’t needed for the last two new chevies I bought.My point: the dealership I do business with only gets my tradein (after a well played ‘dance’)but nothing on service.So it has been,so it shall always be…..

“Little plastic parts that are unique to your car are better than selling drugs or pornography. Nobody else makes them, so your friendly carmaker lists them at sometimes hundreds of dollars, and often they cost pennies to make.”

Actually, I’ve purcahsed some of those parts (in my case a pair of headlight lense assemblies)on a discount website at a fraction of the dealer price. For a low tech item I’m not worried about “genuine” and they’ve worked just fine.

It depends on the vehicle in question. For normal halogen lamps, it’s probably no big deal, but I’d be wary of putting those aftermarket “angel-eye” units in a BMW. I guess I’m overly cautious, but on those sorts of things, I’d rather do pre-owned or reconditioned than aftermarket.

“What about the huge profits (expressed as a percentage) in floorplans?”

That’s the key to the entire business. The leveraged returns on new car sales are higher than they are for used cars, plus they provide gateways to F&I profit and cheap trade-ins.

If a dealer sells a car quickly enough, then the holdback pays all of the financing costs, plus provides a profit. And a new car carries less risk: If a car proves to be unpopular, then the manufacturer will provide incentives to move it.

Think of this way: they “lose” money on the new car bait just to hook you with the F&I and service/parts. I worked for a company that printed some of the “marketing material” for several large auto dealership chains and 90% of their articles were focused on how to pump $$$ out of customer via financing gimmicks (Lo-Jack, Rust Proofing, “Gold” Warranty, Road Side Assistance, etc).

Most people buying a new car MUST finance it so you’ve got a captive audience plus just like anything else (the cars themselves, the parts, the silly keychains and floor mats) the dealership group gets nice volume discounts. You pay 6% but the bank is only really charging 4, the dealership skims that 2% difference into their pockets. Or there is some other kickback: finance 10 customer this week and the sales manager gets a round trip flight, golf lessons or a free Disney cruise.

This is why they advertise new cars like crazy. The dealership sells ONE thing but has positive cash flow for FIVE years! Read the fine print on any new car ad… the low payments require financing thru their corporate mothership (Ford Motor Credit, GMAC, etc) Very few companys other then cell phone providers have such a lucrative system.

Customer doesn’t pay? No biggie… repo the vehicle, smack their credit score down (which means they pay MORE next time) and resell the car on the already mentioned super profitable used lot. Customer does pay: no problem, just get them to trade in while they are still upside down on the loan, then you can easily double up by rolling the money into the next deal.

If the dealer shells out about $150 to floor plan the car and then sells the car for invoice, the several hundred dollars collected in holdback becomes the basis for paying the floorplan and providing the profit.

A business that can clear $400-500 on a $150 investment is a nice business to be in. But it does require enough sales volume in order to cover the high fixed costs, plus a favorable floor plan to provide cheap credit.

Why is it that “most” people “must” finance new cars? I had to finance my first car in America, because I had $200 in my pocket when I bought it (little less actually). Went through all this emploment verification and stuff. But once you have a job — almost any job — for more than 6 months, you can get the car by writing a check. New cars are ridiculously cheap, on the tune of $15k, if you aren’t trying to be fancy. What really happens is that people try not to save, because either a) inflation eats almost any kind of saving that’s available for the common man, except mayby risky stocks (where you get creamed by volatility and taxes) or b) they have minds of deadbeats. If they saved just a little bit, and if they did not buy more car than can afford, they would buy cars with cash always.

You might not have the opportunity to go to an independent shop for much longer. Carmakers like BMW and Mercedes are increasingly using proprietary software which they only lease or license to their own dealers. They are cutting out the indepdenpents.

Congress needs to pass a law here to preserve the ability of the independents to compete.

Another scam the dealer’s service will pull is purposely misdiagnosing a driveability problem as there’s never guarantee that one repair will fix all problems (or get you back on the road). They’ll just say your car came in with TWO problems… After the third ‘attempt’ they’ll probably get it right and you’re only out $3,000+ for a $700 problem.

Part of the reason is backyard mechanics will send a car owner to the dealer for a diagnosis only. The backyard mechanic ends up with egg on his face and guess who’s back at the dealer? Then the scam continues without missing a beat.

Interesting info. I’m one to buy a new car and keep it for 12+ years, so depreciation never enters my mind.

Besides warranty repairs, I’ve never taken a car back to the dealer for anything….the only exception is my wife’s Highlander. It’s a great dealer, their oil change prices are very reasonable, and there’s no hard sell of anything additional. When repairs do come up, I also get a quote from our trusty mechanic.

I’ve owned three new cars, an ’02 VW, ’08 Saab, and now an ’11 BMW. Both the Saab and BMW include “free maintenance” so off to the dealer they go, but as I posted previously, I am not paying on penny to the dealer beyond what the Maker is covering. Was never an issue at Saab (not the dealer I bought it from), they never tried to get me to do anything unneeded. So far, the BMW dealer tried once when I had it in for inspection, but did not try anything else when I had it in for the first service a few months later. Maybe they made a note in my file.

The VW I did take to the dealer even though I was paying – their prices were simply very reasonable, and for a relatively new car I think there is value in that stamped service history book. They did oil changes for about what I could DIY for plus a few bucks, thier fee for mileage based services was reasonable and they never, ever tried to push anything unneeded on me over the four service intervals I had the car.

I have bought plenty of parts from dealers, but otherwise I have not paid for dealer service for any of the cars I have bought used. My Jeep will be going into the Jeep dealer for an airbag recall fix – will be interesting to see if they try to get me to pay for anything else while I am there. I won’t. :-)

What if you bought that same car carefully in the used market after 3 years and kept it for 9, while savings 40% of the full price (remember fees and taxes on new cars are higher)? That typically works out better as long as you put effort into getting a well maintained and softly driven car. That’s what I would say is a good compromise although I’ve got a friend that prides himself on buying $3000 8 year old cars and driving them for 3 years without putting much in and then selling for $3000. He’s a bit of a maniac about it though, so it’s not for everyone.

The thing is saving 40% on a 3yo one is simply a myth. Depreciation is always in relation to MSRP, but who ever pays MSRP these days?

For example, my BMW was $46K US MSRP. A 3yo one, if you could even FIND one like mine, would only be around $10-12K cheaper – the big hit comes at year 5 when the warranty is over. But the thing is, I only actually paid $39K for my car after all the discounts, both negotiated and for Euro Delivery. And I would not have gotten .9% financing on a used car, more like 2.9%. I would save a little on sales tax and excise tax. But in return you give up 3 years of wear and tear and 3-years of warranty. I’m not a gambler, so I do not play the extended warranty game – the house always wins on that one.

The numbers work out similarly for the popular mid-size beigemobiles, Accords and Camrys and such. Things like Impalas and Galants SEEM like you get a great deal on the used one, but in reality someone got a huge discount off MSRP to buy it in the first place, and so could you!

I suppose if you are shopping 7-series and S-classes you might get to a real 40% discount after 3 years – those cars really do depreciate like they are falling off a cliff.

Depreciation on cars is a lot lower these days than it used to be. In fact, its almost downright linear on many cars.

E.g. my parent’s first Prius (early Gen2) is, after 8 years and 100K miles, worth 50% of what they paid for it. Even my “depreciate like a stone” Mazda 6 (hatch, gas guzzler V6), after 9 years and 80K miles, is still only about 60% depreciated.

A good metric is lease prices: A 3 year lease for 30K miles must cover the depreciation and the working-captial (interest rate) cost.

Lets take a 328i lease at $360 a month and $3,844 cash due at signing, for a car worth $41K MSRP. So in that 3 years, total lease cost is $16K. Interest at 2% (BMW’s cost) leaves $15K total cost. So assuming BMW gains NO PROFIT from the lease at all: ALL lease money goes to just cover depreciation that says 35% depreciation over 3 years. In reality, they are probably betting on closer to $10K in depreciation (25%) over those 3 years.

Seeing both sides of the dealer / OEM relationship:
Dealer profit from the service side is way down since the late 90’s / early 2000’s. It may be why service parts sales margins have increased – to keep these dealers’ service departments afloat. The service department I worked for (Goodwrench) has easily laid off 1/3 of it’s staff and replaced maybe half of it with younger, cheaper mechanics due to the drop in warranty work. They sure as hell miss old Lansing / Linden / Oklahoma City Assembly and the garbage platforms they pumped out. Easy plant controlable warranty work.
Queue DeadWeight and a ecoboost warranty revenue comment:

Know nothing about the new dealer side of the business but would you happen to know how Toyonda dealers stayed afloat when they truly built the best products? I can’t imagine it was service, I would have to assume volume?

Funny, the Toyota and Honda dealers near me have HUGE service bays, and they are always full. Wonder why that is?

My buddy with the V6 Accord had things done at the dealer that I have never, ever had to do on ANY of my European cars, ever, like $2K to replace rusted out brake and fuel lines on a 10yo car… Yup, that’s quality right there!

In the mid-1990’s, both Toyota and Honda by virtue of their”voluntary” import restrictions, would routinely have pre-sold all their incoming inventory. When you have two customers for each new car, it makes it really easy to hold out for Monroney retail and sometimes even more, as in the infamous ADP stickers (additional dealer profit). In Honda’s case several high-profile dealers and Honda execs were convicted of racketeering because of wide-spread bribery to secure additional allocation. I grew up in the domestic industry, but used to gaze enviously at the imports’ business model. The really funny thing is that had GM, Ford and Chrysler just managed to maintain the status quo of 1986, they would still be the envy of the world. They literally fiddled while ignoring the fire.

28-Cars-Later,
I would say Toyota/Honda dealers just didn’t have the overhead and infrastructure for service like the dealer I worked at. All I know is once GM started giving a crap about quality (it was a very noticeable shift in product) and walked away from their massive manufacturing footprint (it’s still way too large), and focused on product, my dealer felt it where they used to make most of their money. Cars were better. Plant controllables improved.

olddavid has it right. Monroney label… I haven’t heard anyone use that term outside of work.

Toyota dealer parts are somewhat more expensive than GM or Ford, and there is slightly less availability in the aftermarket, so, that part of a Toyota dealer can be profitable even on slightly less service volume. My experience is that there are still a higher percentage of Toyota/Lexus owners who take them to to the dealer post-warranty than the Domestics or German. The Honda/Acura experience is probably similar, with Honda parts even less common aftermarket (not internet, talking PepBoys, etc.)

“Funny, the Toyota and Honda dealers near me have HUGE service bays, and they are always full. Wonder why that is?”

Honda has less than 1,100 dealers. Toyota has about 1,200 dealers in the US. Ford has 3,700 dealers to sell 8% more cars than Toyota. While Honda dealers only sell about 100 cars more than twice as many as Ford dealers do, Toyota dealers move almost three times as many vehicles as Ford dealers do. That means big service bays, and valuable franchises. You keep wondering though. The truth won’t make you feel clever.

My daily driver is a Honda. When I went into to get the oil changed at 12,000 miles, the service writer wanted to charge me $70 to change the oil which included a safety check. I laughed, and told him to just change the oil. A safety check,, especially at 12,000 miles?!

I told my wife about it, and asked her if she would have paid it. She said probably so because he recommended it. And thinking back to it, their waiting room was full of women…

We were ready to buy a new BMW at the end of last year. We had our model and specs picked out, did our research, and went on two long test drives. We started internet negotiations with three dealers–all three stalled and backed down when they realized we were not trading in a car and planned to pay cash. We withheld that information as long as possible, but in the end all of them refused to sell us a new BMW at the price we had verbal agreement on once they realized their two big moneymakers (finance and trade in) would net them zero. They all stopped returning phone calls and e-mail messages.

In the end we just gave up and decided to soldier on with our current fleet another year or two. The next car won’t be a BMW (we currently have a BMW and a MINI so it’s not like we couldn’t be loyal customers). The sole determining factor here was their unwillingness to sell to a cash buyer with no trade in. We weren’t low-balling–our offers were closer to invoice than sticker, but not by much. ALL of the BMW incentives are based on financing or leasing so the company’s business model shuts us out as consumers.

So where are the statistics on people who wanted to buy new cars but decided not to?

Why would you not finance the car and then immediately pay it off? There is no penalty for doing so.

Personally, I had the money to buy my BMW outright, AND pre-arranged financing from my Credit Union at 2.5%, but BMW offered me .9% – I could not say no, left my money making me money and used BMWs. I’ll have it paid off long before the warranty is up. I paid about $700 over ED invoice for my car, at the local dealer 2 miles from my house. ~$2.5K off ED MSRP, which was $3.5K off US MSRP.

In my case they made me an insultingly low-ball offer for a trade-in on my 2yo Saab, which I completely expected. I sold it privately for $6K more than their offer. I saw the writing on the wall for Saab and got out when the getting was still good. It was a great car though.

I used to argue with RF on a regular basis. My contention was that although GM was one of the most ineptly run companies ever, eventually sheer survival would force them to their knees and they would embrace meaningful change and go forward.After all, what’s good for GM is good for America, right? He would claim that they were merely the corporate analogue of an Old Town junkie, playing out the string until the inevitable OD would claim their pustulated soul. Damn, but his unique brand of lunacy was absolutely correct. My mistake was believing that they would actually look at their books, and seeing that GMAC was their ONLY regular profit contributor, keep it on the straight and narrow so as to maintain their one black-figured bottom line entry. What happens? They chop off the goose’s neck, hoping to find eggs enough to buy just one more fix. It took arrogance and stupidity of epic proportions to bankrupt GM. Now, my ex-colleagues who oversaw their ill-advised entry into the subprime mortgage market are being shuffled back onto the line at 30-50% less wages and forced to move to Butte. Only in America do we fail to learn from our past. Just like our current Federal budget arguments, which I was taught in Econ 301 had been settled in favor of Keynesian theory, yet are being re-hashed yet again as though the Crash of 1929 never happened. How did humans ever get to be an apex predator?

I think it’s fitting, seeing how they screwed my grandmother out of retirement healthcare by running themselves into the ground. You’re such a kool-aid drinker – I bet you didn’t make any sacrifices for your holy cow, did you?

Getting rid of GMAC was the smartest business move of all time. Ever hear of RESCAP? It was GMAC’s mortgage company and when the 2008 melt down hit RESCAP had billions in worthless paper. GM would have gone tits up much sooner without dumping GMAC.

“The really funny thing is that had GM, Ford and Chrysler just managed to maintain the status quo of 1986, they would still be the envy of the world.”

Not. They spewed out mostly trash back then, and by this time Toyonda had their number, cranking out Camrys and Accords and never looking back. The only reprieve the domestics got was pickup trucks and the SUV craze.

I was referring to market share and dealer network, as well as the relative health of the three captive finance arms of said manufacturers. Also, I was only a GMAC trainee for 18 months, but as in all related industry, many of my friends worked – and still work – for the General. One in particular- after shrinkage in the midwest- was demoted and transferred to a smaller city with a 30% wage cut. A decent man, but he was one of those who had 25 years – one year 25 times. Not sharp enough to take the buyout and make the leap. Unfortunately, a too familiar story with the results played out for all to see.

BS,
I am dieing to know. Grandma was a 1st gen. born to German immigrants.
Along with many other wisdom’s she would way tt not dt, dt is lower German. Since your are a self proclaimed Kraut tt not dt, what was that all about?

GM upper management still makes poor decisions. My friends inside the GM machine all were allocated to the Volt for almost an entire year. GM redirected all Powertrain operations to the Volt. All of it (from what they described). Did they do this in all aspects of development? Now you see reactionary desperation on products like the Malibu (drug through the mud GMX-380). Is the K2XX the same thing? I don’t think so, but who knows?

It’s a god damned shame what GM has turned into since my grandfather was a regional finance director for GMAC. I wouldn’t be building cars if it weren’t for that legacy. I don’t think his generation would have screwed it up like this.

olddavid rambled about the good old days and why they went bankrupt…then wrote:

‘Now, my ex-colleagues who oversaw their ill-advised entry into the subprime mortgage market are being shuffled back onto the line at 30-50% less wages and forced to move to Butte’

Which makes absolutely no sense….you came back with ‘yep some old GM’ Re-read it….if you have tequilla goggles on…take them off.

He’s either saying:

A. its stupid that his ex-colleagues who made bad decisions are being brought back?
B its sad that those stupid people are being brought back at less pay?
C its sad they have to move to Butte??? and take less pay?

My point was that they were demoted, banished and essentially relieved of any policy-making responsibility, yet their progeny seem to have not learned the lesson. I’m not very articulate sometimes. No tequila.

You people are daft…every bloomin last one of you… financing cars… in this day and age?… With OBD2…and the high quality most cars come from the factory with… and the phony baloney posturing that all of you posters on TTAC seem to have…and you would think there would be enough basic knowledge amongst you-all to be able to buy good used cars… for cash…But alass…the true colors come out and this big pile of knowitalls about everthing… at least everything vehicular related… as a group falls prey to the nitwit notion that buying a car… or ANYTHING… using time payments is wise.
My gosh, to even discuss “financing” and all its ins and outs… as a serious topic… instead of deriding the whole idea…and mocking it for the hoax that it is… and for the killer of the entire middle class… A whole website devoted to all things automoive… and it digresses to banal discussions of the world of finance… if my wife… or daughter… or son ever financed a car… I’d laugh them out of the room… I wouldn’t stop laughing for months. Because… they already drive the best cars made… lets see… oh yeah… they are the best… its just that they are 8 years old. And I am willing to argue any day of the week that an 8 to 15 year old car… bought used… with cash… from original owners…gets you the very best cars in the world for 1/3rd the price you nitwit “finance people” pay. But then what the hell… be my guest… Drive your Neon, your Fiat 500, your whatever the heck you could get the best finance deal that week. And I and mine… will be driving trouble free… worry free.. Lexus’s… Subarus… V8 Explorers… and what ever the hell else strikes our fancy. Again…at 1/3rd to 1/4th the price… make that 1/10th the price that you finance people think is a good deal. Geeze.. you all make me laugh.

I agree, but around here, you will be ridiculed for even THINKING about paying cash. I’m done buying new because I’m older and wiser, but mostly because I hope to retire someday.. Anyways, I’m glad people here are so eager to buy new for a lot of reasons.

While I get your point, and I would agree that *a lot* of people truly cannot afford that which they are driving, there are still **a lot** of people who can afford it and don’t mind paying it.

There are lots of reasons to buy new: you have very specific requirements on what you want, you can’t spend the time/hassle tracking down something used, your time is worth more to you, you have no mechanical skills for DIY, you simply don’t care, you don’t want to buy an unknown, etc.

When I facilitate sales training for my clients, I ask “How many times have you thought about turning onto a dealer’s lot to look at a car but didn’t because you didn’t want to deal with an aggressive sales person?” Lots of hands are raised.

Well, dealers have decided the same, aggressive approach sales works on the service drive as well. Driven by incentive pay programs for service writers and techs, they are forced to increase throughput at the expense of care and caution. It’s easy to understand why customers opt for non-dealer service, post warranty.

I drive a BMW 335d. Not convinced a near-20k oil change interval is actually a good idea, the (sole) local dealer quoted $175 for oil/filter change only, calling back immediately to apologize for his error. It was actually $225!!!

An independent BMW-specialty shop did it for $130 using uber expensive OEM filter Castrol SLX. Still higher than DIY, but at least I wasn’t “serviced” by the dealer.

I’m lucky in that my Audi dealership has an *excellent* service department, as in when I do something stupid (ie: try to remove my nav system and get the unlock key stuck in the dash), they chuckle and fix it for me on the house. They’ve pushed for goodwill work on my car and they’ve been very responsive.

That said, they’re horribly expensive for ‘routine’ maintenance. Front pads and rotors: $1,100; Timing belt and water pump for a 2.0TSI: $2,350. If money were no object I’d have no problem paying it because they do an exemplary job. Unfortunately, unicorns don’t crap cash so I go to an excellent independent mechanic. Sure it’s more inconvenient and the loaner car is a 250,000 mile ’01 Passat held together with duct tape and string, but the difference is:
Front pads and rotors: $500
Timing belt and water pump: $795

The trick for the dealership is in finding a balance between volume and profit: I would gladly keep my business with them, but they would have to reduce their rates by 40-50%. Something tells me that they’re not terribly interested in doing that. Maybe what the dealers need to do is to open up the equivalent of a ‘store brand’ service department down the street from the dealership: you don’t get the pamper-your-booty service and lattes, and you may have to accept a 20 year old Hyundai as a loaner, but you get a significant discount.

Those are prices that people who value time over money pay. The “just get it done” folks who don’t have to look at prices. While the front pads and rotors at my indy shop may have been a bit pricey, the offset with the timing belt, combined with some convenience factors made it well worth the money. I have no problem with this guy making a few bucks – he’s worth it.

Interesting thoughts . . . regarding GMAC. It’s true that the company got into trouble . . . but not be lending money on cars, but buy succumbing to the real estate mania. General Electric is a great example of a company that makes about half of its money by financing purchasers of its products. They’ve been doing that for decades. If GMAC had stuck to financing cars, GM would have been in a lot better shape.

Regarding the “four-square” thing, the essence of a good deal is one that meets both parties’ needs. Since there is more than one variable in buying a car, the “four square” doesn’t necessarily mean the customer is getting screwed . . . unless the customer is too feeble to deal with a transaction that involves more than one variable. The cash customer isn’t “saving” the interest on a car loan because he’s incurring an opportunity cost for putting his cash into a car, instead of another investment. So, if BMW or somebody wants to offer 0.9% interest on a car loan, the smart customer will take that deal and arbitrage the difference between what he can make with that money and what he’s paying BMW credit. If he doesn’t think he can make 0.9% on his money, after taxes, then he should pay cash. Otherwise, he should borrow. Certainly some people don’t have the cash to spend for a car. Those people should shop for the best credit deal.

Same thing with trade-in. If you don’t like what the dealer is offering, check out what Carmax will pay or sell the car yourself. Which is another reason to keep a car a long time (so it’s not worth much). The trade-in will be a smaller share of the entire transaction, so the cost of not selling the car yourself and taking the dealer’s lousy offer is less.

Finally, there’s depreciation. When it was time to replace our principal car in 2008, my wife wanted a Honda Pilot. After pricing 2 year old used Pilots and new ones, the difference was small, so we bought a new one. But that’s not the case for all cars. For our second car, which I drive, it makes sense to buy a well-maintained used car with a good reputation for reliability. I don’t drive that many miles. With the various pricing tools available on the web, one can get a pretty good idea of “true” depreciation by researching the transaction price on a new car, rather than working off sticker.

And, if you buy a used car from a dealer, you can — with Carfax — figure out how long the car has been sitting on the dealer’s lot. A car that’s been sitting on the lot for a while has a lot of negotiating room. In my case, a roadster that had been sitting on the dealer’s lot since fall had a lot of negotiating room, when I bought it in January.

Yikes. With a quick google for A4 front pads and rotors I found list prices of $150 to $200. I didn’t check on factory prices but I’m sure there are aftermarket parts of more than adequate performance I hope even the independent shop shop gives at least a kiss on the cheek before the screwing. Bear in mind they charge list for parts and they pay about 75% to 80% of list. Add probably 1 to 1.5 hours for labor and I’d figure they’re making about $200 to $250 on a brake job. Ouch.